How to Understand Financial Statements So That You Can Make Money from Them

Financial statements are a helpful tool that may be used to evaluate the health of a company and compare it to others in its industry. They reveal what the firm owes to others as well as what it owns, as well as the earnings or losses it has incurred over the course of a specified time period and how their position has evolved since their most recent statement. If you can determine the path that a firm is going to take, you can also make quite accurate projections regarding the pricing of its stocks in the future.

Acquiring a fundamental understanding of financial statements and putting that understanding to use when selecting or evaluating investments can help you select stocks that will be profitable in the future while allowing you to steer clear of those that will be unprofitable in the future.

The analysis of financial statements does not always take into account significant news events, unanticipated incidents, changes in management, and other factors that may influence share prices; however, it does provide a starting point from which to gauge the present value of shares, which is independent of any future occurrences that may occur.

The following report provides a summary of several straightforward approaches for interpreting and analyzing financial statements. This article is aimed at giving investors the capacity to grasp the figures and simpler financial ratios and to be able to use that information to assist them in making better judgments while performing their due diligence, despite the fact that the topic can go much deeper and be more difficult.

Sheet of Balances

When it comes to annual reports, the balance sheet often reflects the company's financial standing as of a particular date, which is typically the last day of the company's fiscal year. The assets that the company possesses and the liabilities that are owed to it are listed on one side of the balance sheet. The other side of the ledger depicts the company's liabilities, which are the debts that it owes, and it also has shareholders' equity, which reflects the amount by which the company's assets are greater than its liabilities. Book value is another term that is frequently used to refer to shareholders' equity.

The sum of the company's liabilities and the equity held by its shareholders is equivalent to the total amount of the company's assets. To put it another way, once you deduct the company's liabilities from its assets, the value that remains is what the shareholders actually possess.

Discovering the value of the company, as well as its debt load and cash situation, can be accomplished with the use of the balance sheet.

A Statement of Earnings

It is also known as the income statement or profit and loss statement, and it details the amount of revenue that a company earned throughout the course of the year through the sale of its goods and services, as well as the amount of expenses that the firm experienced as a result of things like wages, taxes, and operational costs, among other things. The annual profit or loss of the business can be calculated by subtracting this number from the other. The earnings that remain after taxes are denoted as net earnings.

The term "net earnings" refers to the amount of money that a company "really" made over the course of the previous fiscal year. It is possible for some companies to have low earnings because they spend a large portion of their money on things such as research and development, the acquisition of other companies, the fueling of aggressive growth, the movement into new markets, etc. This scenario is much more favorable for the company than the scenario in which the company had low earnings because they didn't generate many revenues, their expenses were too high, etc.

Financial Position and Results of Operations Statements

This demonstrates the shift that occurred in the company's financial status from one year to the next. This document, also known as the cash flow statement, provides information about how the company made cash and spent it over the year.

This statement can be used to evaluate a company's liquidity and solvency, as well as that company's ability to create cash internally, repay loans, reinvest in itself, and so on and so forth.

Reporting Resources for Financial Institutions

You can, without a doubt, receive financial information from the companies themselves. The majority will gladly send you their most recent quarterly and yearly reports by fax or mail at your request.

On the other hand, accessing the information via the internet is typically a more expedient option. Visit Yahoo.com, for instance, and select the stock quotes menu option. If you enter the ticker symbol of the company in which you are interested, Yahoo will provide its most current press releases. These releases will include historical quarterly and yearly reports as well as financial statements. You can also check the previous reports to see how the company has been doing in the past and to look for patterns (such as an increasing debt burden, uncertain earnings, dropping revenues, inconsistent revenues, etc.). You can do this by going back and looking at the financial statements.

There are also a great number of other websites on the internet that provide information that is comparable to this, such as wsrn.com, bigcharts.com (for information pertaining to Canadian concerns), etc.

The art of shopping around

Try searching the financials of three different firms that you own or are interested in so that you can get a better understanding of some of the data.

(Sheet of Balances) Which of these businesses has the most significant amount of long-term debt? Is it the case that any of the corporations have current obligations that are higher than their current assets? When compared to the shareholder's equity, also known as the book value, the current share price should be evaluated to determine whether it is significantly higher or lower than the book value.

(Acknowledgment of Earnings) What were the total sales for the most recent year (or quarter), and does this amount represent a rise in sales when compared to the prior period or a reduction in sales? How much profit (or loss) did the company make per share in the most recent accounting period, and what was that profit?

(Statement of Changes in Financial Position) (Statement of Changes) Have more obligations been taken on by the corporation, or have there been fewer? According to the statement, what was the most significant expense that the company had to deal with?

Making a Call or a Choice

Be aware of the fact that a company's financial statements can offer shareholders only a limited picture of the company's fundamentals. They are merely a single piece of the overall picture. Keep in mind that although financial statements can assist investors in making comparisons between different companies, such comparisons can only be made with the figures that are supplied.

To put it another way, you can observe that one firm made money while the other company lost money, but you don't know which company has a better technical outlook (based on examination of the trade chart), which company is a potential takeover target, which company will have the best future profitability, etc.

In addition, the effect of financial statements on share prices is typically one that lasts for a considerable amount of time. One quarter of increased earnings may or may not have a substantial influence on shares, depending on the market's reaction to the news. However, four quarterly reports showing increasing earnings may be enough to propel the stock into an upward trend as the market begins to notice the fundamental improvements the underlying company has made.

As a result, the majority of investors utilize financial statements as a component of a larger, more comprehensive decision-making process. Having said that, it is without a doubt true that any investor who puts in the effort to make informed trading selections would profit from having a comprehension of and familiarity with the data.

Several Points Worth Noting

In the case of many growth enterprises, having positive earnings is neither required nor expected. Instead, they tend to rack up debt as they concentrate on the research and development of new technologies, aggressively move into new industries, compete with other companies for market dominance, etc. On the other hand, other businesses with fewer opportunities for expansion put a greater emphasis on achieving actual profitability, bringing down overall operational expenses, and so on.

Make sure you have a good understanding of which data are significant to a certain company and which ones are not significant to that organization, depending on their scenario and the position they are in. Performing an industry comparison on the company in issue is a straightforward process that can be initiated by visiting wsrn.com.

Do businesses operating in the same sector appear to have positive earnings, or is the emphasis instead placed on expansion, research, etc.? Is their company larger or smaller than the norm for the sector, and are they expanding at a quicker rate than the competition?

Make sure you read the fine print to ensure that the data you are looking at has been audited and is not merely the estimation of the corporation or results that have not been validated. Although this is not often something you will need to be concerned about when dealing with the vast majority of exchange-listed companies, maintaining this practice is essential.

Many annual statements may begin with positive news about sales or revenue increases or other positive comments; however, additional reading will reveal that the company actually lost more money, increased debt, or had a difficult quarter or year. This is because many annual statements begin with positive news about sales or revenue rises or other nice comments. Even if the results as a whole were less than desirable, a company's financial statements are typically included in its marketing materials, so the majority of businesses need to ensure that the information they present in those statements comes across as impressive and upbeat.

Be mindful of gains or losses that only occur once. For instance, a corporation might come out ahead financially for the quarter as a result of a large lawsuit settlement that they won and the resulting influx of cash. How successful would they have been, though, if the one-time unusualness wasn't taken into account? Visit http://www.pennystockinsider.com for further information.